The so-called fiduciary rule, six years in the making and unveiled by the Labor Department last spring, holds brokers and advisers who work with tax-advantaged retirement savings to a fiduciary standard as opposed to the previous suitability standard. That means they must work in the best interest of their clients and generally avoid conflicts, which can come about with the commission-based compensation common among brokers and insurance agents. [bolding my own]

I’m not going to argue the merits of this “fiduciary rule” in this post. I think its benefits are obvious, and I’m guessing most of you do, too.

This issue affects you if have a retirement account and want to be protected from predators in the financial industry who are more persuaded by their own financial benefits than by your financial needs. Which is to say, um, everybody.

If you work in the tech industry, you almost certainly have a 401(k). Boom…you are affected by this rule (or its non-existence). Are you also a woman? In general, women are less confident about investing and money (even if studies show women are better investors). So I fear there’s an extra danger that you might be taken advantage of by slick salespeople in financial-advice clothing.

How Are You Protected from Financial Predators?

What I do want to discuss is this: If this rule is rescinded or significantly revised, the entire responsibility for ensuring the advice you get is in your best interests remains on your shoulders. This is, really, just a continuation of the status quo:

There are no structures in place to protect you against bad advice (criminal advice, sure…but there are lots of ways to screw you without doing something illegal).

So, my dear reader, I’m afraid this means you have to spend the time and effort learning the basics of how the financial-advice profession works. I am hopeful, however, that knowing just a few terms and just a few pointed questions to ask a potential financial advisor will guide you well.

My Very Short “Devil’s Dictionary” of Financial Terms that Matter to You

There are all sorts of industry terms that, if you knew them, would be a good shortcut to understanding how to get the kind of financial guidance you need and deserve. Here’s my unofficial dictionary. (If you want a complete “devil’s dictionary” of financial terms, the financial writer Jason Zweig has written exactly that.)

Fiduciary standard vs. Suitability standard:

Short answer: Fiduciary is the one you want your advisor to adhere to. Suitability is not.

Longer answer: A fiduciary standard requires a financial professional place your interests ahead of her own. If two otherwise identical mutual funds have different costs, the professional must place you in the cheaper one.A suitability standard allows the financial professional to make recommendations and sell you products that are perhaps not Outright Awful but certainly are not the best for you, most likely because the professional is getting commission or other compensation for recommending it. To continue the example, the professional could place you in the more-expensive of the two mutual funds.

Complicating factor: Some financial professionals can be subject to the fiduciary standard some of the time, but to the suitability standard other times.

Short answer: If you want advice, go to an RIA. If you want to buy financial products, go to a BD.

Longer answer: Advisors working at an RIA are subject to the fiduciary standard and usually get paid directly by you, the client. Advisors working at BDs are subject to the suitability standard and usually get paid by commissions.

Complicating factor: Many, if not most, RIAs still sell product on commission, in addition to giving you advice. Usually, it’s insurance products and annuities. That introduces a conflict of interest.

Certified Financial Planner(™)

Short answer: The gold-standard for financial planners, the CFP® designation subjects its practitioners to a fiduciary standard.

Complicating factor: Technically, the CFP® rules of conduct require the fiduciary standard only when the professional is working in a financial planning capacity. How, exactly, is a client supposed to know when the professional crosses the line into “salesperson”?

Thankfully, it’s not necessary to understand all that mumbo jumbo in order to protect yourself. Hell, I’ve been in the industry for… 8 years now? And I still don’t understand much about the BD side of the world. Furthermore, this video by a very well-respected financial planner talks about the 4, count ‘em 4, kinds of fiduciary financial advisors. As if you can be expected to keep up with that!

This isn’t a rule-based approach—you can always find loopholes in rules (think: the tax code). This is a principles-based approach. It takes more effort, but it also yields better results.

Ask these questions when interviewing potential financial advisors:

Are you independent? Some advisors can give any advice they want (within the law, of course) about finances or investments. Other advisors are affiliated with a larger company that might constrain their advice, especially on investments and insurance, to products that the larger company sells.

How are you paid? Based on products they sell to you (insurance policies, investments) or based on the advice and service they give you (hourly or project fees, monthly retainer, as a percentage of your assets under management)?

Are you subject to the fiduciary standard at all times when working with me? Will there ever be a time you could work with me in a non-fiduciary relationship? We’re trying to close up all those loopholes.

What conflicts of interest do you have? We all have them, regardless of our compensation structure, legal status, etc. You need to know which ones your potential advisor has.

If an advisor sells investment or insurance products, she has an incentive to sell products to her clients that aren’t best for them.

If an advisor manages money and charges a percentage of those assets (as I do), she has an incentive to maximize the amount of money she manages for a client, even if using that money to pay down a mortgage, buy an annuity, or take the trip of a lifetime is better for the client.

If an advisor works on retainer (as I do), she has an incentive to do as little work as possible for a client.

If an advisor works on an hourly basis, she has an incentive to spend as long as possible working on a client’s project.

If she works on a project basis, she has an incentive to spend as little time as possible completing the project.

As a bonus, the simple act of asking these questions will intimidate or put on the defensive the kind of advisor you don’t want, and will impress the hell out of the kind of advisor you do want.

I feel compelled to say that having conflicts of interests, selling insurance or investment products, being subject to the suitability standard…these do not make someone a bad financial advisor. But I think a financial advisor can be good despite all of those things, not because of them.

It is, alas, up to you, the consumer, to ask the right questions and decide what kind of financial advisor is right for you. I know where I stand. But, then, again, I have an incentive to stand there, don’t I?

Question: How do you find financial advice that is in your best interest? You can leave a comment below.

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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner and/or an accountant for advice specific to your situation. Reproduction of this material is prohibited without written permission from Meg Bartelt, and all rights are reserved. Read the full Disclaimer.

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2 Comments

beth Says

Meg Says

06 February 2017

Well, thanks, Beth! The legislation itself is 1000 pages long, and I admit to not knowing/understanding most of it. But in the spirit of “principles, not rules,” I feel ok with not knowing all the details. If one commits to being a fiduciary to 100% of clients 100% of the time, then everything gets much simpler. It’s when you trying to “work” the rules to your own advantage that you have to be really careful about not crossing lines.